For most Australian adults, debt is a part of our daily lives. Regardless of whether you wish to advance your skills by obtaining a degree, invest in a house for your family, or purchase a car so your family has transport, securing a loan is very common simply because we don’t have enough money to pay for these expenses upfront. It appears that most people obtains a loan at one point or another, so what’s the issue?
The problem is that too many people don’t recognise the difference between good debt and bad debt, and as a result, they take on too much bad debt which can produce substantial financial problems in the coming years. Not all loans are created equal, and commonly you’ll find a colossal difference between your credit card interest rates and your home loan interest rates. With time, your credit report will have a serious effect on your borrowing abilities, so paying your bills on time and not defaulting on any loans is essential, in conjunction with keeping a healthy balance between good debt and bad debt.
Each time you apply for credit, your financial institution will review your credit report to analyse your financial history and then decide whether they’ll approve your loan. Too much bad debt on your credit report will be viewed adversely by lenders, as it exhibits poor financial decisions and behaviours. To make sure that you maintain healthy financial habits, it’s important that you understand the difference between good debt and bad debt.
What’s the difference?
The difference between good debt and bad debt is relatively straightforward. Good debt is commonly an investment that will increase in value over time and will assist you in building wealth or providing long-term income. On the other hand, bad debt primarily decreases in value rapidly and does not add any value to your wealth or generate a long-term return. To give you some understanding, the following gives some examples of each of these types of debts.
The price of land has traditionally increased with time, so acquiring a home loan is considered a good debt because the value of your land will increase in time. In addition, home loans commonly have low interest rates and a long term, normally 20 to 30 years, which suggests that the value of your property can double or triple during the life of your loan.
Obtaining a loan to invest in the stock market is also regarded as good debt considering that the returns on the stock market are traditionally favourable. Lending institutions usually view stock exchange loans as good debt because you are striving to boost your wealth with time through a firm investment. Be careful though, it’s not a good idea to invest in the stock exchange unless you have an acceptable amount of knowledge.
Another kind of good debt is investing in your education, whether it be university or a trade, given that it improves your skills and your capacity to earn a higher income down the road. In Australia, the interest on HECS loans are equal to inflation which clearly makes them a very appealing option.
Credit cards are often the worst type of debt a person can have. Credit card debts illustrates to lenders that you have poor financial habits because the interest rates are exceedingly high and you have nothing in value to show for your investment. People with credit card debts generally have problems in securing future credit from loan providers.
Cars and consumer goods
Another kind of bad debt is loans for vehicles and other consumer goods. When you secure a loan to buy a car, it instantly decreases in value when you drive it out of the car dealership. The same applies to consumer goods like flat screen TVs, because you are effectively paying interest for something that depreciates in value very rapidly.
Borrowing to repay debt
If you end up in a position where you need to secure a loan to repay existing debt, it’s best to seek financial guidance as quickly as possible. This kind of borrowing will only lead to further money problems, and the sooner you act, the more solutions will be available to you to resolve the issue. If you end up facing a mountain of debt, phone the specialists at Bankruptcy Experts on 1300 795 575, or alternatively visit our website for more information: www.bankruptcyexperts.com.au